10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-4879

Diebold, Incorporated

(Exact name of registrant as specified in its charter)


Ohio		34-0183970

(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

5995 Mayfair Road, PO Box 3077, North Canton, Ohio		44720-8077

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (330) 490-4000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Yes þ No o

Indicate the number of shares outstanding of each of the issuer’s classes of common shares, as of the latest practicable date.


Class		Outstanding at August 10, 2005
Common Shares $1.25 Par Value		70,361,122 Shares

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

PART I – FINANCIAL INFORMATION

ITEM 1. FINANICAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)


				(Restated)
	(Unaudited)			December 31,
	June 30, 2005			2004
ASSETS
Current assets
Cash and cash equivalents	$	143,172		$	184,045
Short-term investments		35,186			31,654
Trade receivables, less allowances of $10,911 and $10,176, respectively		566,562			583,658
Inventories		351,695			322,293
Prepaid expenses		32,746			22,892
Other current assets		103,130			90,090

Total current assets		1,232,491			1,234,632

Securities and other investments		49,730			52,248

Property, plant and equipment, at cost		630,262			614,114
Less accumulated depreciation and amortization		(348,979	)		(346,024	)

		281,283			268,090
Goodwill		400,852			412,625
Other assets		193,738			167,957

	$	2,158,094		$	2,135,552

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Notes payable	$	31,906		$	289,510
Accounts payable		127,310			140,324
Deferred income		150,952			92,862
Other current liabilities		207,129			217,494

Total current liabilities		517,297			740,190

Notes Payable – Long-term		275,201			—
Other Long-term liabilities		150,606			146,454

Shareholders’ equity
Preferred shares, no par value, authorized 1,000,000 shares, none issued		—			—
Common shares, par value $1.25, authorized 125,000,000 shares; issued 74,488,861 and 74,233,384 shares, respectively outstanding 70,619,905 and 71,592,293 shares, respectively		93,111			92,792
Additional capital		189,725			179,259
Retained earnings		1,132,232			1,101,492
Treasury shares, at cost (3,868,956 and 2,641,091 shares, respectively)		(173,549	)		(113,687	)
Accumulated other comprehensive loss		(26,152	)		(10,738	)
Other		(377	)		(210	)

Total shareholders’ equity		1,214,990			1,248,908

	$	2,158,094		$	2,135,552

See accompanying notes to condensed consolidated financial statements.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
				(Restated)						(Restated)
	2005			2004			2005			2004
Net Sales
Products	$	297,701		$	263,322		$	533,973		$	480,619
Services		321,249			282,407			620,127			558,739

		618,950			545,729			1,154,100			1,039,358

Cost of sales
Products		215,569			170,140			383,658			316,893
Services		246,041			212,912			474,234			421,267

		461,610			383,052			857,892			738,160

Gross Profit		157,340			162,677			296,208			301,198

Selling and administrative expense		89,936			83,013			171,944			162,450
Research, development and engineering expense		14,054			14,540			28,319			29,769

		103,990			97,553			200,263			192,219

Operating Profit		53,350			65,124			95,945			108,979

Other income (expense)
Investment income		2,612			2,242			5,327			4,961
Interest expense		(3,782	)		(2,360	)		(6,534	)		(4,361	)
Miscellaneous, net		(4,894	)		(912	)		(5,153	)		(1,012	)
Minority interest		(1,507	)		(1,032	)		(2,463	)		(2,584	)


Income before taxes		45,779			63,062			87,122			105,983

Taxes on income		14,629			20,125			28,120			33,821


Net income from continuing operations	$	31,150		$	42,937		$	59,002		$	72,162

Discontinued Operations
Income from discontinued operations		1,228			1,091			1,370			990
Income tax expense		(408	)		(401	)		(461	)		(403	)

Income from discontinued operations		820			690			909			587

Net Income	$	31,970		$	43,627		$	59,911		$	72,749

Basic weighted-average shares outstanding		71,031			72,176			71,344			72,477
Diluted weighted-average shares outstanding		71,511			72,680			71,874			73,026

Basic earnings per share
Income from continuing operations	$	0.44		$	0.59		$	0.83		$	0.99
Income from discontinued operations	$	0.01		$	0.01		$	0.01		$	0.01
Net income	$	0.45		$	0.60		$	0.84		$	1.00

Diluted earnings per share
Income from continuing operations	$	0.44		$	0.59		$	0.82		$	0.99
Income from discontinued operations	$	0.01		$	0.01		$	0.01		$	0.01
Net income	$	0.45		$	0.60		$	0.83		$	1.00

Cash dividends paid per common share	$	0.205		$	0.185		$	0.410		$	0.370

See accompanying notes to condensed consolidated financial statements.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)


	Six Months Ended June 30,
				(Restated)
	2005			2004
Cash flow from operating activities:
Net income	$	59,911		$	72,749
Adjustments to reconcile net income to cash provided by operating activities:
Income from discontinued operations		(909	)		(587	)
Minority share of income		2,463			2,584
Depreciation and amortization		39,699			33,359
Deferred income taxes		3,907			(365	)
Loss on sale of assets, net		378			46
Cash (used) provided by changes in certain assets and liabilities:
Trade receivables		21,596			(22,050	)
Inventories		(31,692	)		(60,360	)
Prepaid expenses		(10,000	)		(10,200	)
Other current assets		(17,927	)		(11,389	)
Accounts payable		(14,948	)		(12,952	)
Certain other assets and liabilities		18,947			17,566

Net cash provided by operating activities		71,425			8,401

Cash flow from investing activities:
Payments for acquisitions, net of cash acquired		(18,241	)		(35,429	)
Proceeds from maturities of investments		22,835			8,021
Payments for purchases of investments		(18,179	)		(5,212	)
Capital expenditures		(29,824	)		(23,295	)
Rotable spares expenditures		(7,382	)		(5,140	)
Increase in certain other assets		(13,590	)		(10,054	)

Net cash used by investing activities		(64,381	)		(71,109	)

Cash flow from financing activities:
Dividends paid		(29,171	)		(26,807	)
Notes payable borrowings		581,109			456,474
Notes payable repayments		(544,313	)		(362,069	)
Distribution of affiliate’s earnings to minority interest holder		(629	)		(498	)
Issuance of common shares		3,555			4,242
Repurchase of common shares		(56,031	)		(53,432	)

Net cash (used) provided by financing activities		(45,480	)		17,910

Effect of exchange rate changes on cash		(2,437	)		(1,848	)


Decrease in cash and cash equivalents		(40,873	)		(46,646	)
Cash and cash equivalents at the beginning of the period		184,045			169,951

Cash and cash equivalents at the end of the period	$	143,172		$	123,305

See accompanying notes to condensed consolidated financial statements.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except per share amounts)

1. CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with United States generally accepted accounting principles; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of the results for the interim periods. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto together with management’s discussion and analysis of financial condition and results of operations contained in the company’s Annual Report on Form 10-K/A for the year ended December 31, 2004 as filed with the Securities and Exchange Commission (SEC) on August 12, 2005. Refer to the restatement discussion below for further information regarding the nature of the amendment.

In addition, some of the company’s statements in this quarterly report on Form 10-Q report may be considered forward-looking and involve risks and uncertainties that could significantly impact expected results. A discussion of these risks and uncertainties is contained in management’s discussion and analysis of financial condition and results of operations in this Form 10-Q. The results of operations for the six-month period ended June 30, 2005 are not necessarily indicative of results to be expected for the full year.

Restatement

The company has filed amendments, on August 12, 2005, to its Annual Report on Form 10-K for the year ended December 31, 2004 and its quarterly report on Form 10-Q for the quarter ended March 31, 2005, to amend and restate financial statements and other financial information for the years 2004, 2003 and 2002 and financial information for the years 2001 and 2000, for the quarter ended March 31, 2005, and for each of the quarters in the year 2004 and 2003 with respect to a reconciliation issue in its North America sales commission accrual account. All amounts are before tax unless otherwise noted. A detailed analysis of this reconciliation has been performed and the company has determined that the commission account was under-accrued by approximately $13,200 at December 31, 2004 and approximately $11,400 at March 31, 2005. First quarter 2005 commission expense was overstated by approximately $1,800. Commission expense was understated by approximately $300, $2,700 and $1,500 in 2004, 2003 and 2002, respectively. The remaining approximately $8,700 understatement of commission expense was related to periods prior to fiscal year 2002.

The results of the analysis were reported to KPMG LLP and to the Audit Committee of the Board of Directors by management. During the discussions with the Audit Committee, management recommended to the Audit Committee that previously reported results for the company be restated to reflect the correction of the error. On July 26, 2005, the Audit Committee agreed with this recommendation. The Audit Committee of the Board of Directors has discussed the matter with KPMG LLP.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(In thousands, except per share amounts)

Restatement (Continued)

The effects of the restatement on certain line items of the balance sheet as of December 31, 2004, as well as the income statement for the three and six months ended June 30, 2004, are presented below. The restatement had no effect on net cash provided by operating activities as the decrease in net income from continuing operations for the six months ended June 30, 2004 was offset entirely by the change in certain other assets and liabilities for the same period.

Condensed Consolidated Balance Sheet


	December 31, 2004
	As
	previously		Restatement
	reported		Adjustment			As restated
Other current liabilities	$	205,927		11,567		$	217,494
Total current liabilities		728,623		11,567			740,190
Retained earnings		1,113,059		(11,567	)		1,101,492
Total shareholders’ equity		1,260,475		(11,567	)		1,248,908

Condensed Consolidated Income Statements (Unaudited)


	Three Months ended June 30, 2004
	As					Discontinued			Continuing
	previously		Restatement			operations			operations as
	reported		adjustment			*adjustment ()**			*restated ()**
Net sales	$	552,043	$	—		$	(6,314	)	$	545,729
Cost of sales		386,786		152			(3,886	)		383,052
Gross profit		165,257		(152	)		(2,428	)		162,677
Operating expenses		98,979		(89	)		(1,337	)		97,553
Operating profit		66,278		(63	)		(1,091	)		65,124
Income before taxes		64,216		(63	)		(1,091	)		63,062
Taxes		20,549		(23	)		(401	)		20,125
Net income (*)		43,667		(40	)		(690	)		42,937

Earnings per share: (*)
Basic	$	0.60	$	—		$	(0.01	)	$	0.59
Diluted	$	0.60	$	—		$	(0.01	)	$	0.59


	Six Months ended June 30, 2004
	As					Discontinued			Continuing
	previously		Restatement			operations			operations as
	reported		adjustment			*adjustment ()**			*restated ()**
Net sales	$	1,050,298	$	—		$	(10,940	)	$	1,039,358
Cost of sales		745,014		300			(7,154	)		738,160
Gross profit		305,284		(300	)		(3,786	)		301,198
Operating expenses		195,176		(162	)		(2,796	)		192,219
Operating profit		110,108		(138	)		(990	)		108,979
Income before taxes		107,112		(138	)		(990	)		105,983
Taxes		34,276		(51	)		(403	)		33,821
Net income (*)		72,836		(87	)		(587	)		72,162

Earnings per share: (*)
Basic	$	1.00	$	—		$	(0.01	)	$	0.99
Diluted	$	1.00	$	—		$	(0.01	)	$	0.99


(*)		Refer to Note 13 for further discussion of discontinued operations.

Reclassification

The company has reclassified the presentation of the cash flow statement for the six months ended June 30, 2004 to conform to the current-year presentation.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(In thousands, except per share amounts)

2. STOCK OPTION PLANS

Under the 1991 Equity and Performance Incentive Plan, as amended and restated (1991 Plan), the company has granted stock options that are outstanding as of June 30, 2005. The company applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for stock options granted under the 1991 Plan. Generally, no stock-based compensation cost was reflected in net income, as all options granted under the 1991 Plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. The fair value of each option grant was estimated on the date of grant using the Black Scholes option pricing model with the following assumptions for 2005 and 2004, respectively: risk-free interest rate of 3.6 and 3.0 percent; dividend yield of 1.4 and 1.6 percent; volatility of 30 and 38 percent; and average expected lives of six years for options granted to management and four years for options granted to executive management and nonemployee directors. There was no effect on income from discontinued operations or basic or diluted earnings per share from discontinued operations if the company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
				(Restated)						(Restated)
	2005			2004			2005			2004

Income from continuing operations, as reported	$	31,150		$	42,937		$	59,002		$	72,162
Deduct: Total stock-based employee compensation expense determined under fair value method, net of tax		(1,183	)		(1,226	)		(2,369	)		(2,336	)

Income from continuing operations, pro forma	$	29,967		$	41,711		$	56,633		$	69,826


Net income, as reported	$	31,970		$	43,627		$	59,911		$	72,749
Deduct: Total stock-based employee compensation expense determined under fair value method, net of tax		(1,183	)		(1,226	)		(2,369	)		(2,336	)

Net income, pro forma	$	30,787		$	42,401		$	57,542		$	70,413


Basic earnings per share:
Income from continuing operations – as reported	$	0.44		$	0.59		$	0.83		$	0.99
Income from continuing operations – pro forma	$	0.42		$	0.58		$	0.79		$	0.96

Net income – as reported	$	0.45		$	0.60		$	0.84		$	1.00
Net income – pro forma	$	0.43		$	0.59		$	0.81		$	0.97

Diluted earnings per share:
Income from continuing operations – as reported	$	0.44		$	0.59		$	0.82		$	0.99
Income from continuing operations – pro forma	$	0.42		$	0.57		$	0.79		$	0.96

Net income – as reported	$	0.45		$	0.60		$	0.83		$	1.00
Net income – pro forma	$	0.43		$	0.58		$	0.80		$	0.96

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(In thousands, except per share amounts)

3. EARNINGS PER SHARE

The basic and diluted earnings per share computations in the condensed consolidated statements of income are based on the weighted-average number of shares outstanding during each period reported. The following data show the amounts used in computing earnings per share and the effect on the weighted-average number of shares of potentially dilutive common stock.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
			(Restated)				(Restated)
	2005		2004		2005		2004
Numerators:
Income used in basic and diluted earnings per share:
Income from continuing operations	$	31,150	$	42,397	$	59,002	$	72,162
Income from discontinued operations		820		690		909		587

Net income	$	31,970	$	43,627	$	59,911	$	72,749
Denominator:
Basic weighted-average shares		71,031		72,176		71,344		72,477
Effect of dilutive fixed stock options		480		504		530		549

Diluted weighted-average shares		71,511		72,680		71,874		73,026


Basic earnings per share:
Income from continuing operations	$	0.44	$	0.59	$	0.83	$	0.99
Income from discontinued operations	$	0.01	$	0.01	$	0.01	$	0.01
Net income	$	0.45	$	0.60	$	0.84	$	1.00

Diluted earnings per share
Income from continuing operations	$	0.44	$	0.59	$	0.82	$	0.99
Income from discontinued operations	$	0.01	$	0.01	$	0.01	$	0.01
Net income	$	0.45	$	0.60	$	0.83	$	1.00

Anti-dilutive shares not used in calculating diluted weighted-average shares		791		480		668		353

4. INVENTORIES

Domestic inventories are valued at the lower of cost or market applied on a first-in, first out (FIFO) basis, and international inventories are valued using the average cost method, which approximates FIFO. At each reporting period, the company regularly identifies and writes down its excess or obsolete inventory to its net realizable value based on forecasted usage, orders and inventory aging. With the development of new products, the company also rationalizes its product offerings and will write down discontinued product to the lower of cost or net realizable value.

Major classes of inventories are summarized as follows:


	June 30, 2005		December 31, 2004
Finished goods	$	107,510	$	92,806
Spare parts		65,174		77,715
Work in process		140,577		123,156
Raw materials		38,434		28,616

Total inventory	$	351,695	$	322,293

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(In thousands, except per share amounts)

5. OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive loss is reported separately from retained earnings and additional capital in the condensed consolidated balance sheets. Items considered to be other comprehensive loss include adjustments made for foreign currency translation (under SFAS No. 52) and pensions (under SFAS No. 87). Components of other accumulated comprehensive loss consist of the following:


	June 30,			December 31,
	2005			2004

Translation adjustment	$	(18,197	)	$	(2,783	)
Pensions, less accumulated taxes of $(3,541) for 2005 and 2004		(7,955	)		(7,955	)

		(26,152	)	$	(10,738	)

Components of comprehensive income consist of the following for the six months ended June 30:


				(Restated)
	2005			2004

Net income	$	59,911		$	72,749
Other comprehensive income:
Translation adjustment		(15,414	)		(33,996	)

	$	44,497		$	38,753

6. BENEFIT PLANS

The company has several pension plans covering substantially all United States employees. Plans covering salaried employees provide pension benefits that are based on the employee’s compensation during the 10 years before retirement. The company’s funding policy for salaried plans is to contribute annually if required at an actuarially determined rate. Plans covering hourly employees and union members generally provide benefits of stated amounts for each year of service. The company’s funding policy for hourly plans is to make at least the minimum annual contributions required by applicable regulations. Employees of the company’s operations in countries outside of the United States participate to varying degrees in local pension plans, which in the aggregate are not significant.

In addition to providing pension benefits, the company provides healthcare and life insurance benefits (referred to as Other Benefits) for certain retired employees. Eligible employees may be entitled to these benefits based upon years of service with the company, age at retirement and collective bargaining agreements. Currently, the company has made no commitments to increase these benefits for existing retirees or for employees who may become eligible for these benefits in the future. As of September 30, 2004, the company eliminated life insurance coverage for its retirees. Currently there are no plan assets and the company funds the benefits as the claims are paid.


	Pension Benefits						Other Benefits
	2005			2004			2005			2004

Components of Net Periodic Benefit Cost Three months ended June 30
Service cost	$	3,099		$	2,975		$	1		$	19
Interest cost		5,570			5,299			313			389
Expected return on plan assets		(7,239	)		(7,271	)		—			—
Amortization of prior service cost		280			303			(153	)		(73	)
Amortization of initial transition asset		(164	)		(374	)		—			—
Recognized net actuarial loss		584			231			132			115

Net periodic pension benefit cost	$	2,130		$	1,163		$	293		$	450

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(In thousands, except per share amounts)

6. BENEFIT PLANS (continued)


	Pension Benefits						Other Benefits
	2005			2004			2005			2004

Components of Net Periodic Benefit Cost Six months ended June 30
Service cost	$	6,198		$	5,949		$	2		$	37
Interest cost		11,140			10,598			626			778
Expected return on plan assets		(14,478	)		(14,542	)		—			—
Amortization of prior service cost		560			606			(306	)		(145	)
Amortization of initial transition asset		(328	)		(747	)		—			—
Recognized net actuarial loss		1,168			462			264			230

Net periodic pension benefit cost	$	4,260		$	2,326		$	586		$	900

Employer Contributions

The company expects to contribute $1,880 to its non-qualified pension plan and $3,018 to its other postretirement benefit plan in 2005. There have been no significant changes to the 2005 contribution amounts previously disclosed. As of June 30, 2005, no contributions have been made.

7. RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Also, SFAS No. 123(R) provides significant additional guidance regarding the valuation of employee stock options. While SFAS No. 123(R) does not require the use of a specific option-pricing model, it does indicate that lattice models usually will provide a better estimate of fair value of an employee stock option. The company currently prepares the pro forma disclosures required under SFAS No. 123 using the Black-Scholes option-pricing model. On April 14, 2005, the U.S. Securities and Exchange Commission announced a deferral of the effective date of SFAS No. 123(R) for calendar year companies until the beginning of 2006; however, early adoption is permitted. The company intends to implement this standard in the first quarter of 2006.

As permitted by SFAS No. 123, the company currently accounts for share-based payments to employees using the APB Opinion No. 25 intrinsic-value method and, as such, generally recognizes no compensation cost for employee stock options because options granted equal fair market value on date of grant. Accordingly, the adoption of the SFAS No. 123(R) fair value method will affect the company’s results of operations. The impact of adoption of SFAS No. 123(R) on future net income and earnings per share has not yet been determined. However, had the company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 2. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current accounting guidance. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. The company cannot estimate what those amounts will be in the future because they depend on, among other things, when employees exercise stock options.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(In thousands, except per share amounts)

8. ACQUISITIONS

The following mergers and acquisitions were accounted for as purchase business combinations and, accordingly, the purchase price has been allocated to identifiable tangible and intangible assets acquired and liabilities assumed, based upon their respective fair values, with the excess allocated to goodwill.

In May 2005, the company announced the acquisition of TASC Security. TASC Security is a global leader in electronic security solutions headquartered in London, England with regional offices in Amsterdam, Netherlands; Tokyo, Japan; San Francisco, USA; Dublin, Ireland; Leeds, England; and Melbourne and Sydney, Australia; along with a network of offices in Europe, the Middle East, Africa and Asia Pacific. TASC Security was purchased for approximately $29,000, including the payoff of certain debt arrangements, and will be integrated within the company’s Electronic Security and Currency Systems Group. Estimated goodwill and intangibles amounted to approximately $21,300.

In June 2004, the company acquired TFE Technology Holdings, LLC, for a total purchase price of $34,450, including the payoff of certain debt arrangements. The company has completed the process of valuing other intangible assets apart from goodwill initially recorded at the time of the transaction. As a result, during the second quarter of 2005, the company reclassified $22,417 from goodwill to other intangible assets to reflect the value of the trade name, customer relationships and contracts, non-compete agreements and internally-developed software acquired. The amortization period related to these other intangible assets was initiated in the second quarter of 2005.

9. SEGMENT INFORMATION

The company’s segments are comprised of its three main sales channels: Diebold North America (DNA), Diebold International (DI) and Election Systems (ES). These sales channels are evaluated based on revenue from customers and operating profit contribution to the total corporation. The reconciliation between segment information and the Condensed Consolidated Financial Statements is disclosed below. Revenue summaries by geographic area and product and service solutions are also disclosed below. All income and expense items below operating profit are not allocated to the segments and are not disclosed.

The DNA segment sells and services financial and retail systems in the United States and Canada. The DI segment sells and services financial and retail systems over the remainder of the globe. The ES segment includes the operating results of Diebold Election Systems, Inc. and the voting-related business in Brazil. Each of the sales channels buys the goods it sells from the company’s manufacturing plants through intercompany sales that are eliminated in consolidation, and intersegment revenue is not significant. Each year, intercompany pricing is agreed upon, which drives sales channel operating profit contribution. As permitted under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, certain information not routinely used in the management of these segments, information not allocated back to the segments or information that is impractical to report is not shown. Items not allocated are as follows: interest income, interest expense, equity in the net income of investees accounted for by the equity method, income tax expense or benefit, and other non-current assets.


	DNA		DI		ES			Total

Segment Information by Channel for the quarter ended June 30, 2005

Revenue from continuing operations	$	346,192	$	250,347	$	22,411		$	618,950
Operating profit		42,216		9,745		1,389			53,350
Capital and rotable expenditures		13,139		4,006		27			17,172
Depreciation		12,035		3,779		179			15,993

Segment Information by Channel for the quarter ended June 30, 2004

Revenue from continuing operations	$	335,433	$	183,168	$	27,128		$	545,729
Operating profit – (restated)		52,976		9,913		2,235			65,124
Capital and rotable expenditures		6,395		4,678		71			11,144
Depreciation		4,479		5,420		220			10,119

Segment Information by Channel as of and for the six months ended June 30, 2005

Revenue from continuing operations	$	682,686	$	443,148	$	28,266		$	1,154,100
Operating profit/(loss)		90,540		7,848		(2,443	)		95,945
Capital and rotable expenditures		24,234		12,529		443			37,206
Depreciation		19,971		8,681		527			29,179
Property, plant and equipment, at cost		433,715		192,444		4,103			630,262

Segment Information by Channel as of and for the six months ended June 30, 2004

Revenue from continuing operations	$	636,134	$	361,223	$	42,001		$	1,039,358
Operating profit/(loss) – (restated)		92,604		18,268		(1,893	)		108,979
Capital and rotable expenditures		18,505		9,727		203			28,435
Depreciation		12,121		10,965		422			23,508
Property, plant and equipment, at cost		406,879		159,736		3,895			570,510

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(In thousands, except per share amounts)

9. SEGMENT INFORMATION (continued)

Revenue Summary by Geographic Area


	For the quarter ended June 30:				For the six months ended June 30:
	2005		2004		2005		2004

The Americas:
Financial self-service solutions	$	288,859	$	275,411	$	574,925	$	533,567
Security solutions		150,356		122,769		284,810		233,828
Election systems		22,411		27,128		28,266		42,001

		461,626		425,308		888,001		809,396

Asia-Pacific:
Financial self-service solutions		57,539		36,446		98,918		72,285
Security solutions		8,371		7,535		14,708		13,475

		65,910		43,981		113,626		85,760

Europe, Middle East and Africa:
Financial self-service solutions		87,292		76,418		148,351		144,180
Security solutions		4,122		22		4,122		22

		91,414		76,440		152,473		144,202


Total revenue	$	618,950	$	545,729	$	1,154,100	$	1,039,358

Revenue Summary by Product and Service Solutions


	For the quarter ended June 30:				For the six months ended June 30:
	2005		2004		2005		2004

Financial self-service:
Products	$	212,690	$	178,630	$	386,037	$	332,892
Services		221,000		209,645		436,156		417,140

Total financial self-service		433,690		388,275		822,193		750,032

Security:
Products		66,807		61,736		126,858		116,856
Services		96,042		68,590		176,783		130,469

Total security		162,849		130,326		303,641		247,325


Total financial self-service & security		596,539		518,601		1,125,834		997,357

Election systems		22,411		27,128		28,266		42,001


Total revenue	$	618,950	$	545,729	$	1,154,100	$	1,039,358

10. GUARANTEES AND PRODUCT WARRANTIES

The company has applied the provisions of FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others, to its agreements that contain guarantees or indemnification clauses. These requirements expand those required by FASB Statement No. 5, Accounting for Contingencies, by requiring a guarantor to disclose certain types of guarantees and recognize liabilities in certain instances, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in effect as of June 30, 2005 in which the company is the guarantor.

In connection with the construction of two of its manufacturing facilities, the company guaranteed repayment of principal and interest on a total of $13,300 variable rate industrial development revenue bonds by obtaining letters of credit. The bonds were issued with a 20-year original term and are scheduled to mature in 2017. Any default, as defined in the agreements, would obligate the company for the full amount of the outstanding bonds through maturity. At June 30, 2005, the carrying value of the liability was $13,300 and is included in long-term liabilities.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(In thousands, except per share amounts)

10. GUARANTEES AND PRODUCT WARRANTIES (continued)

The company provides its global operations guarantees and standby letters of credit through various financial institutions to suppliers, regulatory agencies and insurance providers. If the company is not able to make payment, the suppliers, regulatory agencies and insurance providers may draw on the pertinent bank. As of June 30, 2005, the maximum future payment obligations relative to these various guarantees totaled $47,367, of which $17,889 represented standby letters of credit to insurance providers, and no associated liability was recorded.

The company provides its customers a standard manufacturer’s warranty and records, at the time of the sale, a corresponding estimated liability for potential warranty costs. Estimated future obligations due to warranty claims are based upon historical factors such as labor rates, average repair time, travel time, number of service calls per machine and cost of replacement parts. Changes in the company’s warranty liability balance are illustrated in the following table:


	2005			2004

Balance at January 1	$	14,410		$	12,096
Current period accruals		8,551			3,809
Current period settlements		(5,936	)		(5,375	)

Balance at June 30	$	17,025		$	10,530

11. RESTRUCTURING CHARGES

During the first quarter of 2005, the company initiated a restructuring plan for its manufacturing and service operations, primarily in Western Europe, to remove its excess capacity. In the second quarter of 2005, the company initiated a separate restructuring plan for the announced closing of its Danville, Virginia manufacturing operations. Total pretax costs to be incurred in the plans are anticipated to be approximately $27,000, of which $3,450 and $10,753 were expensed for the second quarter 2005 and the six months ended June 30, 2005, respectively ($2,318 and $7,254 after tax or $0.03 and $0.10 per diluted share), resulting in an accrual of approximately $1,700 as of June 30, 2005. The restructuring charges for the three and six months ended June 30, 2005 were incurred as follows: $2,177 and $8,960 against product cost of sales; $500 and $844 against service cost of sales and $773 and $949 against general and administrative costs. The restructuring charges for the quarter ended June 30, 2005 were $2,804 in DNA and $646 in DI while for the six months ended June 30, 2004, the charges were $3,298 in DNA and $7,455 in DI.

The actions taken occurred during the first six months of 2005, with the associated expenses expected to be incurred through December of 2005. The charges were comprised primarily of severance and other employee costs associated with staff reductions. Staff reductions resulted in approximately 90 involuntary employee terminations.

12. CREDIT FACILITY AMENDMENT

In April, the company amended its credit facility with JPMorgan Chase Bank, N.A. The credit facility borrowing limit remains the same at $200,000 and 150,000 euros ($193,088). However, the amendment allows the company to add additional borrowing capacity of up to $150,000 under the facility if the company chooses to do so. The amendment also increased the existing one-year term of the credit facility to a five year term, expiring on April 27, 2010. All covenants have remained the same.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(In thousands, except per share amounts)

13. DISCONTINUED OPERATIONS / SUBSEQUENT EVENTS

In July 2005, the company announced the sale of its campus card systems business for approximately $38,000. Because the assets related to the campus card systems business were considered held-for-sale as of June 30, 2005, the company has disclosed these operations as discontinued in the condensed consolidated statements of income for all periods presented herein in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Separate disclosure of the specific assets held-for-sale, both current and non-current, is not presented as the amounts are not material to the consolidated balance sheets. The following summarizes discontinued operations reclassified from continuing operations in the condensed consolidated statements of income:


	Three Months ended June 30,				Six Months ended June 30
	2005		2004		2005		2004
Net sales	$	6,549	$	6,314	$	11,633	$	10,940
Cost of sales		3,865		3,886		7,365		7,154
Gross profit		2,684		2,428		4,268		3,786
Operating expenses		1,455		1,337		2,898		2,796
Operating profit		1,228		1,091		1,370		990
Income before taxes		1,228		1,091		1,370		990
Taxes		408		401		461		403
Net income		820		690		909		587

Earnings per share:
Basic	$	0.01	$	0.01	$	0.01	$	0.01
Diluted	$	0.01	$	0.01	$	0.01	$	0.01

On August 4, 2005, the Board of Directors of the company authorized the company to repurchase up to 2,000 additional shares of its common stock on the open market.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As of June 30, 2005
(Unaudited)
(Dollars in thousands, except per share amounts)

RESTATEMENT

The company has filed, on August 12, 2005, amendments to its Annual Report on Form 10-K for the year ended December 31, 2004, and to its quarterly Report on form 10-Q for the quarter ended March 31, 2005 to amend and restate financial statements and other financial information for the year 2004 and the quarter ended March 31, 2005 and for each of the quarters in 2004 with respect to a reconciliation issue in its North America sales commission accrual account.

OVERVIEW

Over 145 years ago, Diebold went into the business of making strong, reliable safes. Diebold, Incorporated has a long tradition of safeguarding assets and protecting investments. Today, the company is a global leader in providing integrated self-service delivery systems, security and services to customers within the financial, government, education and retail sectors. In 2003, the company introduced Opteva, a new ATM line within the financial self-service market that provides a higher level of security, convenience and reliability. The new line is powered by Agilis, which is a software platform for financial self-service equipment that was developed by the company in 2002. The combination of Opteva and Agilis provides the ability for financial institutions to customize solutions to meet their consumers’ demands and positively affect equipment performance, while providing a safer ATM. The Agilis software platform gives customers the ability to run the same software across their entire network, which helps contain costs and improve financial self-service equipment availability. The new award-winning generation of financial self-service solutions was developed to deter or discourage ATM fraud. Security features were engineered into the design, including consumer awareness mirrors to discourage shoulder surfing and provide consumers with increased security during ATM transactions. Opteva also includes PIN-pad positioning that helps maintain consumer security, a recessed fascia design, card reader technology with a jitter mechanism, an optional ink-dye system and an envelope depository that is designed to resist trapping. The company’s software includes the industry’s most advanced ATM protection against viruses, worms and other cyber security threats. Diebold is at the forefront in protecting ATMs from threats even before patches are developed and made available. The company established its own Global Security Task Force to collect, analyze, clarify and disseminate news and information about ATM fraud and security. The group includes associates from various departments around the world. These associates work to reduce fraud and to improve security for the industry.

As a result of the company’s continued focus to remain a leader in technology, service and security, significant growth in product revenue was attributable to favorable reaction by the financial sector to this new generation of financial self-service solutions. In addition to the advances in the company’s product line, the company also made a couple of strategic domestic acquisitions during 2004, which increased its presence in the security market.

The election systems business continues to be a challenge for the company, as lower revenue and the settlement of the civil action in California with the state of California and Alameda County in 2004 had a significant negative impact on margin and earnings per share. The company continues to face a variety of challenges and opportunities in responding to customer needs within the election systems market. A number of individuals and groups have raised challenges in the media and elsewhere, including legal challenges, about the reliability and security of the company’s election systems products and services. The parties making these challenges oppose the use of technology in the electoral process generally and, specifically, have filed lawsuits and taken other actions to publicize what they view as significant flaws in the company’s election management software and firmware. These efforts have adversely affected some of the company’s customer relations with its election systems customers. Also, the election systems market continues to evolve. Funding is being provided by the federal government and utilized by the states; however, the guidelines and rules governing the election software and hardware have not yet been fully established. As a result, various states and industry experts are interpreting the election requirements differently. Recent changes in the laws under which election-related products must be certified by a number of states have lengthened the certification process and, in some cases, required changes to the company’s products. For example, some states are requiring paper receipt printers.

As a result of these challenges, and because 2004 was a presidential election year, the company believes that prospective purchases of voting equipment and services by certain government entities were delayed in 2004. Those entities did not want to introduce a new voting solution in a presidential election year and also wanted to see how successful electronic voting was in states that had already implemented the technology. The delay in orders resulted in higher inventory levels of approximately $32 million and lower voting sales in the range of approximately $65 million to $75 million in 2004. As a result of the positive performance of the company’s voting equipment, the positive performance of electronic voting

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

As of June 30, 2005
(Unaudited)
(Dollars in thousands, except per share amounts)

systems in the past presidential election, and the Help America Vote Act (HAVA) requirement that jurisdictions must have HAVA-compliant equipment installed by January 1, 2006, the company expects to recover a significant portion of the delayed sales in 2005, as well as participate in new jurisdiction decisions to purchase voting equipment in 2005, although the delay in orders continued in the first quarter of 2005. Despite these expectations for 2005, future delays or increases in the costs of providing products and services may be encountered as a result of possible future challenges, changes in the laws and changes to product specifications, any of which may adversely affect the company’s election systems sales.

The company intends the discussion of its financial condition and results of operations that follows to provide information that will assist in understanding the financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect the financial statements.

The business drivers of the company’s future performance include several factors that include, but are not limited to:

	•		timing of a self-service upgrade and/or replacement cycle in mature markets such as the United States;

	•		high levels of deployment growth for new self-service products in emerging markets such as Asia-Pacific;

	•		demand for new service offerings, including outsourcing or operating a network of ATMs;

	•		demand beyond expectations for security products and services for the financial, retail and government sectors;

	•		implementation and timeline for new election systems in the United States;

	•		the company’s strong financial position; and

	•		the company’s ability to successfully integrate acquisitions.

In addition to the business drivers above, as a global operation, the company is exposed to risks that include, but are not limited to:

	•		competitive pressures, including pricing pressures and technological developments;

	•		changes in the company’s relationships with customers, suppliers, distributors and/or partners in its business ventures;

	•		changes in political, economic or other factors such as currency exchange rates, inflation rates, recessionary or expansive trends, taxes and regulations and laws affecting the worldwide business in each of the company’s operations;

	•		acceptance of the company’s product and technology introductions in the marketplace;

	•		unanticipated litigation, claims or assessments;

	•		ability to reduce costs and expenses and improve internal operating efficiencies;

	•		variations in consumer demand for financial self-service technologies, products and services;

	•		challenges raised about reliability and security of the company’s election systems products, including the risk that such products will not be certified for use or will be decertified;

	•		changes in laws regarding the company’s election systems products and services; and

	•		potential security violations to the company’s information technology systems.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

As of June 30, 2005
(Unaudited)
(Dollars in thousands, except per share amounts)

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the condensed consolidated financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Management of the company uses historical information and all available information to make these estimates and assumptions. Actual amounts could differ from these estimates and different amounts could be reported using different assumptions and estimates.

Management believes that, of its significant accounting policies, its policies concerning revenue recognition, allowance for bad debts, goodwill, inventory and pensions and postretirement benefits are the most critical because they are affected significantly by judgments, assumptions and estimates. Additional information regarding these policies is included below.

Revenue Recognition

The company’s product revenue consists of sales of ATMs, networking software, servers, electronic security products and voting machines. Service revenue consists of sales of service contracts, installation revenue, maintenance revenue and consultation revenue of bank branch design and security system design. Revenue is recognized only after the earnings process is complete. For product sales, the company determines that the earnings process is complete when the customer has assumed risk of loss of the goods sold and all performance requirements are substantially complete. Election systems revenue is primarily generated through sales contracts consisting of multiple deliverable elements and custom terms and conditions. Each contract is analyzed based on the multiple elements included within the contract. The company determines fair value of deliverables within a multiple element arrangement based on the prices charged when each element is sold separately. Some contracts may contain discounts and, as such, revenue is recognized using the residual value method of allocation of revenue to the product and service components of contracts. For service sales, the earnings process is considered complete once the service has been performed or earned.

Allowance for Bad Debts and Credit Risk

The company evaluates the collectibility of accounts receivable based on a number of criteria. A percentage of sales is reserved for uncollectible accounts as sales occur throughout the year. This percentage is based on historical loss experience and current trends. This estimate is periodically adjusted for known events such as specific customer circumstances and changes in the aging of accounts receivable balances. Since the company’s receivable balance is concentrated primarily in the financial and government sectors, an economic downturn in these sectors could result in higher than expected credit losses.

Inventories

Domestic inventories are valued at the lower of cost or market applied on a first-in, first-out (FIFO) basis, and international inventories are valued using the average cost method, which approximates FIFO. At each reporting period, the company identifies and writes down its excess and obsolete inventory to its net realizable value based on forecasted usage, orders and inventory aging. With the development of new products, the company also rationalizes its product offerings and will write down discontinued product to the lower of cost or net realizable value.

Goodwill

The company tests all existing goodwill at least annually for impairment using the fair value approach on a “reporting unit” basis in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. The company’s reporting units are defined as Domestic and Canada, Brazil, Latin America, Asia Pacific, Europe, Middle East and Africa (EMEA) and Election Systems. The company uses the discounted cash flow method for determining the fair value of its reporting units. As required by SFAS 142, the determination of implied fair value of the goodwill for a particular reporting unit is the excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities in the same manner as the allocation in a business combination. Implied fair value goodwill is determined as the excess of

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As of June 30, 2005
(Unaudited)
(Dollars in thousands, except per share amounts)

the fair value of the reporting unit over the fair value of its assets and liabilities. The company’s fair value model uses inputs such as estimated future segment performance. The company uses the most current information available and performs the annual impairment analysis during the fourth quarter each year. However, actual circumstances could differ significantly from assumptions and estimates made and could result in future goodwill impairment.

Pensions and Postretirement Benefits

Annual net periodic expense and benefit liabilities under the company’s defined benefit plans are determined on an actuarial basis. Assumptions used in the actuarial calculations have a significant impact on plan obligations and expense. Annually, management and the investment committee of the Board of Directors review the actual experience compared with the more significant assumptions used and makes adjustments to the assumptions, if warranted. The healthcare trend rates are reviewed with the actuaries based upon the results of their review of claims experience. The expected long-term rate of return on plan assets is determined using the plans’ current asset allocation and their expected rates of return based on a geometric averaging over 20 years. The discount rate is determined by analyzing the average return of high-quality (i.e., AA-rated) fixed-income investments and the year-over-year comparison of certain widely used benchmark indices as of the measurement date. The rate of compensation increase assumptions reflects the company’s long-term actual experience and future and near-term outlook. Pension benefits are funded through deposits with trustees. The market-related value of plan assets is calculated under an adjusted market value method. The value is determined by adjusting the fair value of assets to reflect the investment gains and losses (i.e., the difference between the actual investment return and the expected investment return on the market-related value of assets) during each of the last five years at the rate of 20 percent per year. Postretirement benefits are not funded and the company’s policy is to pay these benefits as they become due.

The following table highlights the sensitivity of our pension obligations and expense to changes in the healthcare cost trend rate:


	One-Percentage-		One-Percentage-
	Point Increase		Point Decrease
Effect on total of service and interest cost	$	86	$	(77	)
Effect on postretirement benefit obligation		1,424		(1,273	)

Amortization of unrecognized net gain or loss resulting from experience different from that assumed and from changes in assumptions (excluding asset gains and losses not yet reflected in market-related value) is included as a component of net periodic benefit cost for a year if, as of the beginning of the year, that unrecognized net gain or loss exceeds five percent of the greater of the projected benefit obligation or the market-related value of plan assets. If amortization is required, the amortization is that excess divided by the average remaining service period of participating employees expected to receive benefits under the plan.

Certain accounting guidance, including the guidance applicable to pensions, does not require immediate recognition of the effects of a deviation between actual and assumed experience or the revision of an estimate. This approach allows the favorable and unfavorable effects that fall within an acceptable range to be netted. Although this netting occurs outside the basic financial statements, the net amount is disclosed as an unrecognized gain or loss in Note 11 to the company’s Annual Report on Form 10-K/A for the year ended December 31, 2004.

Based on the above assumptions, the company expects pension expense to increase by $3,836 in 2005, increasing from $4,664 in 2004 to approximately $8,500 in 2005. Changes in any of the aforementioned assumptions could result in changes in the related retirement benefit cost and obligation. The company’s qualified pension plans remain adequately funded, and the company is not required to make any additional contributions in 2005. Pension expense excludes retiree medical expense, which is also included in operating expenses and was $667 and $680 for the six months ended June 30, 2005 and 2004, respectively.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

As of June 30, 2005
(Unaudited)
(Dollars in thousands, except per share amounts)

LIQUIDITY AND CAPITAL RESOURCES

Capital resources are obtained from income retained in the business, borrowings under the company’s committed and uncommitted credit facilities, long-term industrial revenue bonds, and operating and capital leasing arrangements. At June 30, 2005, the company had U.S. dollar denominated outstanding bank credit lines approximating $170,858, euro denominated outstanding bank credit lines approximating 107,586 (translated at $130,201) and Indian rupee denominated outstanding bank credit lines approximating 263,000 (translated at $6,048). An additional $106,329 was available under committed credit line agreements and $41,552 was available under uncommitted lines of credit. Management expects that cash provided from operations, available credit, long-term debt and the use of operating leases will be sufficient to finance planned working capital needs, investments in facilities or equipment, and the purchase of company stock. Part of the company’s growth strategy is to pursue strategic acquisitions. The company has made acquisitions in the past and intends to make acquisitions in the future. The company intends to finance any future acquisitions with either cash provided from operations, borrowings under available credit facilities, proceeds from debt or equity offerings and/or the issuance of common shares.

During the six months ended June 30, 2005, the company generated $71,425 in cash from operating activities, an increase of $63,024 or 750.2 percent from the same period in 2004. Cash flows from operating activities are generated primarily from operating income and controlling the components of working capital. The six months ended June 30, 2005, cash flows from operations were positively affected by the $21,596 decrease in accounts receivable compared with an increase of $22,050 in the six months ended June 30, 2004. Total sales increased by $114,742 during the six months ended June 30, 2005 versus the same period in 2004, while days sales outstanding (DSO) improved 16 days over the same time period. DSO was 76 days at June 30, 2005 compared with 92 days at June 30, 2004. The improvement in DSO was due to a new “order-to-cash” process implemented during the second half of 2004. Included in the June 30, 2005 trade receivables were amounts due from San Diego and San Joaquin counties in California totaling approximately $32,000 related to the election systems business. The company expects to collect these receivables in 2005. The increase in inventories during the six months ended June 30, 2005 was $31,692 and was $28,668 less than the $60,360 increase in inventories during the six months ended June 30, 2004. The increase in inventories was due to the continued impact of transitioning to the new Opteva product solution, as well as anticipated strong future orders. Inventory turns improved by 0.2 turns, moving from 5.0 turns at June 30, 2004 to 5.2 turns at June 30, 2005. In addition, the change in certain other assets and liabilities positively affected cash flows from operations during the first half of 2005 by $18,947 as compared with a positive impact of $17,566 in 2004. The change was primarily the result of an increase in deferred income due to increased volume of customer service contract billings.

The company used $64,381 for investing activities during the six months ended June 30, 2005, a decrease of $6,728 or 9.5 percent over the same period in 2004. The decrease over the prior year was primarily the result of lower acquisition investments, which decreased $17,188, moving from $35,429 for the six months ended June 30, 2004 to $18,241 for the same period of 2005. This decrease was partially offset by the $8,771 increase in capital and rotables spares expenditures in the six months ended June 30, 2005 compared to the six months ended June 30, 2004. The increase in capital expenditures was due in part to the company’s continued investment in implementing a global Oracle ERP system. Rotable spares expenditures increased as a direct result of the increase in the company’s service solutions business.

The company used $45,480 for financing activities during the six months ended June 30, 2005, an increase of $63,390 or 353.9 percent compared to $17,910 cash provided by financing activities for the six months ended June 30, 2004. The overall increase in net cash used during the six months ended June 30, 2005 was due to lower net borrowings of $36,796 as compared with net borrowings of $94,405 in the same period in 2004. In addition to the $57,609 decrease in net borrowing, the company increased dividend payments by $2,364 or 8.8 percent and repurchased $2,599 or 4.9 percent more common shares in the first half of 2005 versus the same period in 2004.

Except for the amended credit facility discussed in Note 12 to the condensed consolidated financial statements, contractual

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

As of June 30, 2005
(Unaudited)
(Dollars in thousands, except per share amounts)

cash obligations with initial and remaining terms in excess of one year and contingent liabilities remained generally unchanged at June 30, 2005 compared to December 31, 2004.

RESULTS OF OPERATIONS

Second Quarter 2005 Comparisons with Second Quarter 2004

Net Sales

Net sales for the second quarter of 2005 totaled $618,950 and were $73,221 or 13.4 percent higher than net sales for the second quarter of 2004. Financial self-service product revenue increased by $34,060 or 19.1 percent over the comparable period in 2004, primarily due to continued increase in demand of the Opteva financial self service product line combined with the benefits from the positive currency effects of the real, euro, and other currencies. Security product revenue increased by $5,071 or 8.2 percent over the second quarter of 2004, due primarily to increases in the retail, government and financial security markets as a result of growth in the market, complimented by growth resulting from strategic acquisitions and increased market share. Total service revenue for financial self-service and security solutions increased $38,807 or 13.9 percent over second quarter 2004, as the company continued to expand its service customer base.

Election systems net sales were $22,411, a decrease of $4,717 or 17.4 percent over second quarter 2004. Purchasing delays by county and state governments within the United States as a result from ongoing political debates over electronic voting adversely affected the overall election systems business.

Gross Profit

Gross profit for the second quarter of 2005 totaled $157,340 and was $5,337 or 3.3 percent lower than gross profit in the second quarter of 2004. Product gross margin was 27.6 percent in the second quarter of 2005 compared to 35.4 percent in the comparable period of 2004. The decrease in product gross margin was due to restructuring charges of approximately $2,500 and $2,800 of charges primarily related to start up costs incurred for the Opteva product line in EMEA. Additionally, the decrease in product gross margins was attributable to a heavier mix of revenue derived from lower-margin businesses for the second quarter versus 2004. This includes a higher percentage of national account revenue in the United States, a greater mix of international revenue, particularly from India and Thailand, and increased revenue from the security and election systems businesses.

Service gross margin in the second quarter 2005 decreased to 23.4 percent compared with 24.6 percent in the second quarter 2004. Included in the service cost of sales in the second quarter of 2005 was approximately $600 in restructuring charges. The remaining decrease in service gross margin was due to continued pricing pressures and increased fuel costs.

Operating Expenses

Total operating expenses in the second quarter of 2005 were 16.8 percent of net sales, down from 17.9 percent in the second quarter 2004. Reduced selling and administrative expenses as a percent of revenue accounted for 0.7 percent of the overall 1.1 percent improvement to operating expenses. The improved leveraging of selling and administrative expenses was achieved due to aggressive controls on personnel costs, implementing a corporate-wide efficiency program and reductions to bonus and incentive compensation accruals due to lower performance expectations for the year. Reduced R&D expense resulting from ongoing product rationalization created by the Opteva rollout accounted for the balance of the improvement.

Other Income (Expense)

Investment income for the second quarter 2005 was $2,612, and increased $370 or 16.5 percent over investment income for the second quarter 2004. The increase was due to a larger investment portfolio in 2005. Interest expense for the second quarter 2005 was $3,782 and increased $1,422 or 60.3 percent compared to the second quarter 2004. The increase was due to higher borrowing rates, as well as slightly higher borrowing levels quarter over quarter. Miscellaneous, net for the second quarter of 2005 was $4,894 and increased by $3,982 compared with second quarter 2004. Included in the increase in miscellaneous, net was increased foreign exchange loss of $3,536. The increase in foreign exchange loss was primarily due to the weakening of the US dollar as compared to the euro and other currencies.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

As of June 30, 2005
(Unaudited)
(Dollars in thousands, except per share amounts)

Net Income

Net income for the second quarter of 2005 was $31,970 and decreased $11,657 or 26.7 percent over net income for the second quarter of 2004. The decrease was primarily due to lower gross margins, restructuring charges and increased foreign exchange losses for the second quarter of 2005.

Segment Revenue and Operating Profit Summary

Diebold North America (DNA) second quarter 2005 net sales of $346,192 increased $10,759 or 3.2 percent over the second quarter 2004 net sales of $335,433. The increase in DNA net sales was due to increased product and service revenue from growth in the market as well as gains in market share with the continued favorable response to the Opteva financial self-service product line. Diebold International (DI) second quarter 2005 net sales of $250,347 increased by $67,179 or 36.7 percent compared with net sales in the comparable period of 2004 of $183,168. The increase in DI net sales was attributed to strong revenue growth of $21,929 in Asia Pacific and higher revenue from Latin America of $30,276 and from EMEA of $14,974. During the second quarter of 2005, revenue was positively impacted by the year-over-year strengthening of the real, euro and certain other currencies. The positive currency impact in the second quarter of 2005 was approximately $14,100. Election Systems (ES) second quarter 2005 net sales of $22,411 decreased by $4,717 or 17.4 percent compared to second quarter 2004 net sales of $27,128. Purchasing delays by county and state governments within the United States as a result of ongoing political debates over electronic voting have adversely affected the overall election systems business in 2005.

DNA operating profit for second quarter 2005 decreased by $10,760 or 20.3 percent compared with second quarter 2004. The decrease was primarily attributable to restructuring charges of $2,804 and unfavorable revenue mix and pricing pressure for the second quarter of 2005. DI operating profit for second quarter 2005 decreased by $168 or 1.7 percent compared with the comparable period in 2004. The decrease was primarily due to lower security gross margins, which decreased due to pricing pressure and higher material costs. Operating profit in ES decreased by $846 or 37.9 percent for second quarter 2005 compared to the second quarter 2004.

Refer to Note 9 to the condensed consolidated financial statements for further details of segment revenue and operating profit.

Six Months Ended June 30, 2005 Comparisons with Six Months Ended June 30, 2004

Net Sales

Net sales for the six months ended June 30, 2005 totaled $1,154,100 and were $114,742 or 11.0 percent higher than net sales for the comparable period in 2004. Financial self-service product revenue for the six months ended June 30, 2005 increased by $53,145 or 16.0 percent over the comparable period in 2004, primarily due to growth in the market as well as gains in market share, and the benefits from the positive foreign currency effects. Security product revenue increased by $10,002 or 8.6 percent for the six months ended June 30, 2004, due primarily to increases in the retail, government and financial security markets as a result of growth in the market, complemented by growth resulting from strategic acquisitions and increased market share. Total service revenue for financial self-service and security solutions increased $65,330 or 11.9 percent over 2004, as the company continued to expand its service customer base.

Election systems net sales of $28,266 decreased by $13,735 or 32.7 percent compared to the six months ended June 30, 2004. Purchasing delays by county and state governments within the United States as a result of ongoing political debates over electronic voting have adversely affected the overall election systems business in 2005.

Gross Profit

Gross profit for the six months ended June 30, 2005 totaled $296,208 and was $4,990 or 1.7 percent lower than gross profit in the six months ended June 30, 2004. Product gross margin was 28.2 percent in the six month period ended June 30, 2005 compared to 34.1 percent in the comparable period in 2004. The decline in product gross margin was primarily due to restructuring charges of approximately $9,300, lower product margins in the domestic election systems market, as well as pricing pressure on non-Opteva financial self-service product offerings and U.S. security products. Service gross margin in the six months ended June 30, 2005 decreased to 23.5 percent compared with 24.6 percent in the six months ended June 30, 2004. The service margin decrease was due to continued pricing pressures, increased fuel costs and restructuring charges of approximately $1,000.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

As of June 30, 2005
(Unaudited)
(Dollars in thousands, except per share amounts)

Operating Expenses

Total operating expenses for the six months ended June 30, 2005 were 17.4 percent of net sales, down from 18.5 percent in the six months ended June 30, 2004. The improved leveraging of operating expenses as a percent of net sales was achieved due to aggressive cost controls on personnel costs, implementing a corporate-wide efficiency program and reductions to bonus and incentive compensation accruals due to lower performance expectations for the year. Reduced research and development expense resulting from ongoing product rationalization created by the Opteva rollout accounted for the balance of the improvement.

Other Income (Expense)

Investment income for the six months ended June 30, 2005 was $5,327 and increased $366 or 7.4 percent over investment income for the six months ended June 30, 2004. The increase was due to a larger investment portfolio in 2005. Interest expense for the six months ended June 30, 2005 was $6,534 and increased $2,173 or 49.8 percent compared to same period in 2004. The increase was due to higher borrowing rates and higher borrowing levels year over year. Miscellaneous, net for the six months ended June 30, 2005 was $5,153 and increased $4,141or 409.2 percent compared to the same period in 2004. Included in the increase in miscellaneous, net was foreign exchange losses of $3,699. The increase in foreign exchange loss was primarily due to the weakening of the US dollar as compared to the euro and other currencies.

Net Income

Net income for the six months ended June 30, 2005 was $59,911 and decreased $12,838 or 17.6 percent over net income for the six months ended June 30, 2004. The decrease was primarily due to lower gross margins, restructuring charges and increased foreign exchange losses for the six months ended June 30, 2005.

Segment Revenue and Operating Profit Summary

DNA net sales of $682,686 for the six months ended June 30, 2005 increased $46,552 or 7.3 percent over the comparable period 2004 net sales of $636,134. The increase in DNA net sales was due to increased product and service revenue from growth in the market and gains in market share with the continued favorable response to the Opteva financial self-service product line. DI net sales of $443,148 for the six months ended June 30, 2005 increased by $81,925 or 22.7 percent over the comparable period of 2004 net sales of $361,223. The increase in DI net sales was attributed to strong revenue growth of $27,866 in Asia Pacific and higher revenue from Latin America of $45,788 and from EMEA of $8,271. During the six months ended June 30, 2005, revenue was positively impacted by the year-over-year strengthening of the real, euro and certain other currencies. The positive currency impact in the first half of 2005 was approximately $23,000. ES net sales of $28,266 for the six months ended June 30, 2005 decreased $13,735 or 32.7 percent compared to the six months ended June 30, 2004. Purchasing delays by county and state governments within the United States as a result of ongoing political debates over electronic voting have adversely affected the overall election systems business in 2005. The operating loss in ES increased by $550 or 29.1 percent, moving from an operating loss of $1,893 in the six months ended June 30, 2004 to an operating loss of $2,443 in 2005. This increase in ES operating loss was result of lower margins.

DNA operating profit for the six months ended June 30, 2005 decreased by $2,064 or 2.2 percent versus the comparable period in 2004. The decrease was primarily due to restructuring charges of $3,298 for the six month period ended June 30, 2005. DI operating profit for the six months ended June 30, 2005 decreased by $10,420 or 57.0 percent versus the comparable period in 2004. The decrease was primarily due to restructuring charges of $7,455 for the six month period ended June 30, 2005. The operating loss in ES increased by $550 or 29.1 percent, moving from an operating loss of $1,893 in the six months ended June 30, 2004 to an operating loss of $2,443 in 2005. This increase in ES operating loss was a result of lower margins.

Refer to Note 9 to the condensed consolidated financial statements for further details of segment revenue and operating profit.

OUTLOOK

The following statements are based on current expectations. These statements are forward-looking and actual results may differ materially. These statements do not include the potential impact of any future mergers, acquisitions, disposals or other business combinations, or the effect of expensing stock options under the new accounting standard, SFAS No. 123(R), Share-Based Payment.

Expectations for the third quarter 2005 include:

•

Third quarter revenue is expected to increase 11 to 13 percent on a fixed exchange-rate basis.

	o		Financial self-service revenue growth of 7 to 9 percent, fixed rate.

	o		Security revenue growth of 10 to 12 percent, fixed rate.

	o		Election systems revenue is expected to be $45,000 to $55,000.

•

The company anticipates manufacturing start-up and restructuring total charges in the range of $0.07 to $0.10 per share related to the continued realignment of its operations.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Continued)

As of June 30, 2005
(Unaudited)
(Dollars in thousands, except per share amounts)

	•		Currency exchange is anticipated to impact revenue favorably by approximately 1.5 percent versus prior year.

	•		Depreciation and amortization to be approximately $20,000.

	•		An effective tax rate of approximately 32 percent.

	•		An increase in pension expense of approximately $.01 per share versus prior year.

	•		EPS in the range of $0.74 to $0.79 per share, including the anticipated manufacturing start-up costs and restructuring charges, and the one-time gain of approximately $0.18 per share on the sale of the campus card systems business.

Expectations for the full year 2005 include:

•

Revenue growth of 10 to 12 percent, on a fixed exchange-rate basis.

	o		Financial self-service revenue growth of 6 to 8 percent, fixed rate.

	o		Security revenue growth of 17 to 19 percent, fixed rate.

	o		Election systems revenue is anticipated to be in the range of $115,000 to $125,000.

	o		Brazilian lottery systems revenue of $10,000 to $20,000.

	•		Currency expected to impact revenue favorably by approximately 1.2 percent versus prior year.

	•		Depreciation and amortization in the range of $75,000 to $80,000.

	•		An effective tax rate of approximately 32 percent.

	•		Pension expense is expected to be $0.03 per share higher in 2005, moving from $0.05 per share in 2004 to $0.08 per share in 2005.

	•		Research and development expense will be approximately 2.5 percent of revenue, consistent with prior year.

	•		EPS to be $2.44 to $2.54. This range includes restructuring charges of approximately $0.30, manufacturing start-up costs and related issues of approximately $0.04 per share, and the one-time gain of approximately $0.18 per share on the sale of the campus card systems business.

FORWARD-LOOKING STATEMENT DISCLOSURE

In the company’s written or oral statements, the use of the words “believes,” “anticipates,” “expects” and similar expressions is intended to identify forward-looking statements that have been made and may in the future be made by or on behalf of the company, including statements concerning future operating performance, the company’s share of new and existing markets, and the company’s short- and long-term revenue and earnings growth rates. Although the company believes that its outlook is based upon reasonable assumptions regarding the economy, its knowledge of its business, and on key performance indicators which impact the company, there can be no assurance that the company’s goals will be realized. The company is not obligated to report changes to its outlook. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The company’s uncertainties could cause actual results to differ materially from those anticipated in forward-looking statements. These include, but are not limited to:

•

competitive pressures, including pricing pressures and technological developments;

•

changes in the company’s relationships with customers, suppliers, distributors and/or partners in its business ventures;

•

changes in political, economic or other factors such as currency exchange rates, inflation rates, recessionary or expansive trends, taxes and regulations and laws affecting the worldwide business in each of the company’s operations;

•

acceptance of the company’s product and technology introductions in the marketplace;

•

unanticipated litigation, claims or assessments;

•

ability to reduce costs and expenses and improve internal operating efficiencies;

•

variations in consumer demand for self-service technologies, products and services;

•

challenges raised about the reliability and security of the company’s election systems products, including the risk that such products will not be certified for use or will be decertified;

•

changes in laws regarding the company’s election systems products and services;

•

potential security violations to the company’s information technology systems; and

•

the company’s ability to achieve benefits from its cost reduction initiatives and other strategic changes.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

(Dollars in thousands)

The company is exposed to foreign currency exchange rate risk inherent in its international operations denominated in currencies other than the U.S. dollar. A hypothetical 10 percent unfavorable movement in the applicable foreign exchange rates would have resulted in an increase in year-to-date 2005 operating profit of approximately $376 and a decrease in year-to-date 2004 operating profit of $1,449. The sensitivity model assumes an instantaneous, parallel shift in the foreign currency exchange rates. Exchange rates rarely move in the same direction. The assumption that exchange rates change in an instantaneous or parallel fashion may overstate the impact of changing exchange rates on amounts denominated in a foreign currency.

The company’s risk-management strategy uses derivative financial instruments such as forwards to hedge certain foreign currency exposures. The intent is to offset gains and losses that occur on the underlying exposures, with gains and losses on the derivative contracts hedging these exposures. The company does not enter into derivatives for trading purposes. The company’s primary exposures to foreign exchange risk are movements in the dollar/euro and dollar/real rates. There were no significant changes in the company’s foreign exchange risks compared with the prior period.

The company manages interest rate risk with the use of variable rate borrowings under its committed and uncommitted credit facilities and interest rate swaps. Variable rate borrowings under the credit facilities totaled $307,107 and $289,510 at June 30, 2005 and December 31, 2004, respectively. A one percentage point increase or decrease in interest rates would have resulted in an increase or decrease in annual interest expense of approximately $3,000 and $2,800 for 2005 and 2004, respectively. The company’s primary exposure to interest rate risk is movements in the LIBOR rate, which is consistent with prior period. The company had no derivative contracts hedging interest rate risk as of June 30, 2005.

ITEM 4. CONTROLS AND PROCEDURES

Management, under the supervision and with the participation of the chief executive officer and the chief financial officer, has evaluated the company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report.

As previously announced, during the review of the reconciliation over the North American sales commission accrual account, it was noted that the reconciliation was not performed properly and the North American sales commission accrual appeared to be understated. Accordingly, management determined that a control deficiency related to the reconciliation of the North American sales commission accrual account constituted a material weakness in the company’s internal control over financial reporting as of December 31, 2004 and March 31, 2005.

Management is confident that the company has taken appropriate measures to fully remediate the material weakness in the company’s internal control over financial reporting with respect to the North American sales commission accrual reconciliation. The remedial actions included:

	•		revised the reconciliation procedures to focus on the balance sheet position of the accrual account for North American sales commissions as well as the sales commission expense reported each period, including more senior management review of the reconciliation; and

	•		implemented corporate monitoring procedures to ensure timely completion of the reconciliation of accrual accounts.

Additionally, in preparing for the filing of the second quarter Form 10-Q, it was determined that revenues as previously announced as of June 30, 2005 for the Company’s voting subsidiary, Diebold Election Systems, Inc., were incorrectly recorded. Management has corrected the error, which resulted in a decrease in revenue by $10,273, decrease in cost of sales by $8,020 and a decrease in operating expense by $288. The effect of the correction on the balance sheet resulted in an increase in inventories by $7,264, and a decrease in accounts receivable by $10,273 and other current liabilities by $1,691, respectively. As a result of the error mentioned above and the fact that the error was not detected by management in a timely manner, management has determined that a control deficiency related to revenue recognition on contracts entered into with customers by DESI constituted a material weakness in the company’s internal control over financial reporting as of June 30, 2005. Management is in the process of initiating remediation efforts and is confident that the appropriate measures will be taken in order to ensure that the company appropriately and consistently records revenue.

Under the direction of the chief executive officer and the chief financial officer, the company has evaluated its disclosure controls and procedures as currently in effect, including the remedial actions discussed above, and we have concluded that, as of this date, our disclosure controls and procedures are not effective.

Unrelated to the material weaknesses noted above, the company has implemented the Oracle technology platform in several significant subsidiaries in Europe as well as in Mexico and Australia as of June 30, 2005. These system implementations constitute changes in internal control over financial reporting during the second quarter. Although the company is experiencing certain implementation issues related to these subsidiaries’ internal control over financial reporting, management is confident that there are sufficient compensating controls in place to mitigate the increase in risk caused by the implementations. Other than the remedial actions taken with respect to the material weakness described above and the Oracle technology platform implementations, management has not identified any change in internal control over financial reporting that occurred during the second quarter of 2005 that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

At June 30, 2005, the company was a party to several lawsuits that were incurred in the normal course of business, none of which individually or in the aggregate is considered material by management in relation to the company’s financial position or results of operations. In management’s opinion, the condensed consolidated financial statements would not be materially affected by the outcome of any present legal proceedings, commitments, or asserted claims.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Information concerning the company’s stock repurchases made during the second quarter 2005:

ISSUER PURCHASES OF EQUITY SECURITIES


					(c)		(d)
					Total Number of		Maximum Number of
	(a)		(b)		Shares Purchased as		Shares that May Yet
	Total Number of Shares		Average Price		Part of Publicly		Be Purchased Under
	Purchased(#)⁽²⁾		Paid Per Share		Announced Plans(#)⁽¹⁾		the Plans(#)
April		376,766	$	48.76		374,590		3,396,829
May		774,600	$	48.77		774,600		2,622,229
June		—		—		—		2,622,229


(1)		The company purchased 1,149,190 shares of company stock in the second quarter 2005 pursuant to the Company Stock Repurchase Plan (the Plan). The total number of shares repurchased as part of a publicly announced plan was 3,377,771 as of June 30, 2005. The remaining number of shares that may be purchased under the Plan is 2,622,229. The Plan was approved by the Board of Directors in April 1997 and authorized the repurchase of up to two million shares. The Plan was amended in June 2004 to authorize the repurchase of an additional two million shares, and was further amended in August 2005 to authorize the repurchase of an additional two million shares. The Plan has no expiration date.

(2)		Represents shares surrendered or deemed surrendered to the company in connection with stock option exercises and to satisfy tax withholding obligations in connection with the distribution of shares of stock under employee stock-based compensation plans.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Registrant’s annual meeting of shareholders was held on April 28, 2005. Each matter voted upon at such meeting and the number of shares cast for, against or withheld, and abstained are as follows:

Election of Directors


	For		Withheld
Louis V. Bockius III		63,284,632		1,313,655
Christopher M. Connor		63,688,616		909,671
Richard L. Crandall		63,667,320		930,967
Eric C. Evans		63,068,834		1,529,453
Gale S. Fitzgerald		63,673,360		924,927
Phillip B. Lassiter		63,433,857		1,164,430
John N. Lauer		63,459,743		1,138,544
William F. Massy		63,269,042		1,329,245
Walden W. O’Dell		63,450,726		1,147,561
Eric J. Roorda		63,847,957		750,330
W. R. Timken, Jr.		63,449,178		1,149,109
Henry D.G. Wallace		63,146,957		1,451,330
Patrick Lysobey		14,520		—

Ratification of Appointment of KPMG LLP as Independent Auditors for 2005


For	Against	Abstained
62,599,497	1,741,950	221,432

Approval of Annual Cash Bonus Plan


For	Against	Abstained
60,606,782	2,917,104	1,075,611

There were no broker non-votes.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

PART II. OTHER INFORMATION (Continued)

ITEM 6. EXHIBITS


		Exhibits
3.1	(i)	Amended and Restated Articles of Incorporation of Diebold, Incorporated — incorporated by reference to Exhibit 3.1(i) of Registrant’s Annual Report on Form 10-K for the year ended December 31, 1994. (Commission File No. 1-4879).

3.1	(ii)	Code of Regulations — incorporated by reference to Exhibit 4(c) to Registrant’s Post-Effective Amendment No. 1 to Form S-8 Registration Statement No. 33-32960.

3.2		Certificate of Amendment by Shareholders to Amended Articles of Incorporation of Diebold, Incorporated — incorporated by reference to Exhibit 3.2 to Registrant’s Form 10-Q for the quarter ended March 31, 1996. (Commission File No. 1-4879).

3.3		Certificate of Amendment to Amended Articles of Incorporation of Diebold, Incorporated — incorporated by reference to Exhibit 3.3 to Registrant’s Form 10-K for the year ended December 31, 1998. (Commission File No. 1-4879).

4.		Rights Agreement dated as of February 11, 1999 between Diebold, Incorporated and The Bank of New York — incorporated by reference to Exhibit 4.1 to Registrant’s Registration Statement on Form 8-A dated February 2, 1999. (Commission File No. 1-4879).

*10.1		Form of Employment Agreement as amended and restated as of September 13, 1990 — incorporated by reference to Exhibit 10.1 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 1990. (Commission File No. 1-4879).

*10.2		Schedule of Certain Officers who are Parties to Employment Agreements in the form of Exhibit 10.1 — incorporated by reference to Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended September 30, 2004. (Commission File No. 1-4879).

*10.5	(i)	Supplemental Employee Retirement Plan I as amended and restated July 1, 2002 — incorporated by reference to Exhibit 10.5 (i) of Registrant’s Form 10-Q for the quarter ended September 30, 2002. (Commission File No. 1-4879).

*10.5	(ii)	Supplemental Employee Retirement Plan II as amended and restated July 1, 2002 — incorporated by reference to Exhibit 10.5 (ii) of Registrant’s Form 10-Q for the quarter ended September 30, 2002. (Commission File No. 1-4879).

*10.7	(i)	1985 Deferred Compensation Plan for Directors of Diebold, Incorporated — incorporated by reference to Exhibit 10.7 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 1992. (Commission File No. 1-4879).

*10.7	(ii)	Amendment No. 1 to the Amended and Restated 1985 Deferred Compensation Plan for Directors of Diebold, Incorporated — incorporated by reference to Exhibit 10.7 (ii) to Registrant’s Form 10-Q for the quarter ended March 31, 1998. (Commission File No. 1-4879).

*10.7	(iii)	Amendment No. 2 to the Amended and Restated 1985 Deferred Compensation Plan for Directors of Diebold, Incorporated — incorporated by reference to Exhibit 10.7 (ii) to Registrant’s Form 10-Q for the quarter ended March 31, 2003. (Commission File No. 1-4879).

*10.8	(i)	1991 Equity and Performance Incentive Plan as Amended and Restated as of February 7, 2001 — incorporated by reference to Exhibit 4 (a) to Form S-8 Registration Statement No. 333-60578.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

PART II. OTHER INFORMATION (Continued)

ITEM 6. EXHIBITS (Continued)


*10.8	(ii)	Amendment No. 1 to the 1991 Equity and Performance Incentive Plan as Amended and Restated as of February 7, 2001 - incorporated by reference to Exhibit 10.8(ii) on Registrant’s Form 10-Q for the quarter ended March 31, 2004. (Commission File No. 1-4879).

*10.8	(iii)	Amendment No. 2 to the 1991 Equity and Performance Incentive Plan as Amended and Restated as of February 7, 2001 - incorporated by reference to Exhibit 10.8(iii) on Registrant’s Form 10-Q for the quarter ended March 31, 2004. (Commission File No. 1-4879).

*10.8	(iv)	Amendment No. 3 to the 1991 Equity and Performance Incentive Plan as Amended and Restated as of February 7, 2001 - incorporated by reference to Exhibit 10.8(iv) on Registrant’s Form 10-Q for the quarter ended June 30, 2004. (Commission File No. 1-4879).

*10.9		Long-Term Executive Incentive Plan - incorporated by reference to Exhibit 10.9 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 1993. (Commission File No. 1-4879).

*10.10	(i)	1992 Deferred Incentive Compensation Plan (as amended and restated ) - incorporated by reference to Exhibit 10.10 (i) of Registrant’s Form 10-Q for the quarter ended September 30, 2002. (Commission File No. 1-4879).

*10.11		Annual Incentive Plan — incorporated by reference to Exhibit 10.11 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000. (Commission File No. 1-4879).

*10.13	(i)	Forms of Deferred Compensation Agreement and Amendment No. 1 to Deferred Compensation Agreement — incorporated by reference to Exhibit 10.13 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 1996. (Commission File No. 1-4879).

*10.13	(ii)	Section 162(m) Deferred Compensation Agreement (as amended and restated January 29, 1998) — incorporated by reference to Exhibit 10.13 (ii) to Registrant’s Form 10-Q for the quarter ended March 31, 1998. (Commission File No. 1-4879).

*10.14		Deferral of Stock Option Gains Plan — incorporated by reference to Exhibit 10.14 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 1998. (Commission File No. 1-4879).

*10.15		Employment Agreement with Walden W. O’Dell - incorporated by reference to Exhibit 10.15 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999. (Commission File No. 1-4879).

*10.17	(i)	Amended and Restated Loan Agreement dated as of April 30, 2003 among Diebold, Incorporated, the Subsidiary Borrowers, the Lenders and Bank One, N.A. — incorporated by reference to Exhibit 10.17 to Registrant’s Form 10-Q for the quarter ended June 30, 2003. (Commission File No. 1-4879).

*10.17	(ii)	Amendment No. 1 to the Amended and Restated Loan Agreement dated as of April 30, 2003 among Diebold, Incorporated, the Subsidiary Borrowers, the Lenders and Bank One, N.A. — incorporated by reference to Exhibit 10.17(ii) to Registrant’s Form 10-Q for the quarter ended June 30, 2004. (Commission File No. 1-4879).

*10.17	(iii)	Amendment No. 2 to the Amended and Restated Loan Agreement dated as of April 30, 2003 among Diebold, Incorporated, the Subsidiary Borrowers, the Lenders and Bank One, N.A. — incorporated by reference to Exhibit 10.1 on Registrant’s Form 8-K filed on May 3, 2005. (Commission File No. 1-4879).

		Retirement and Consulting Agreement with Robert W. Mahoney — incorporated by reference to Exhibit 10.18
*10.18	(i)	of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000. (Commission File No. 1-4879).

*10.18	(ii)	Extension of Retirement and Consulting Agreement with Robert W. Mahoney - incorporated by reference to Exhibit 10.18 (ii) of Registrant’s Form 10-Q for the quarter ended September 30, 2002. (Commission File No. 1-4879).

*10.18	(iii)	Extension of Retirement and Consulting Agreement with Robert W. Mahoney — incorporated by reference to Exhibit 10.18 (iii) to Registrant’s Form 10-Q for the quarter ended June 30, 2003. (Commission File No. 1-4879).

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

PART II. OTHER INFORMATION (Continued)

ITEM 6. EXHIBITS (Continued)


*10.18	(iv)	Extension of Retirement and Consulting Agreement with Robert W. Mahoney — incorporated by reference to Exhibit 10.18 (iv) to Registrant’s Form 10-Q for the quarter ended March 31, 2004. (Commission File No. 1-4879).

*10.18	(v)	Extension of Retirement and Consulting Agreement with Robert W. Mahoney — incorporated by reference to Exhibit 10.18 (v) to Registrant’s Form 10-Q for the quarter ended March 31, 2005. (Commission File No. 1-4879).

10.20	(ii)	Amendment No. 1 to the Transfer and Administration Agreement by and among DCC Funding LLC, Diebold Credit Corporation, Diebold, Incorporated, Receivables Capital Corporation and Bank of America, National Association — incorporated by reference to Exhibit 10.20 (ii) on Registrant’s Form 10-Q for the quarter ended March 31, 2001. (Commission File No. 1-4879).

*10.21		Employment Agreement with Eric C. Evans — incorporated by reference to Exhibit 10.21 on Registrant’s Form 10-Q for the quarter ended March 31, 2004. (Commission File No. 1-4879).

*10.22		Form of Non-qualified Stock Option Agreement — incorporated by reference to Exhibit 10.1 on Registrant’s Form 8-K filed on February 16, 2005. (Commission File No. 1-4879).

*10.23		Form of Restricted Share Agreement — incorporated by reference to Exhibit 10.2 on Registrant’s Form 8-K filed on February 16, 2005. (Commission File No. 1-4879).

*10.24		Form of RSU Agreement — incorporated by reference to Exhibit 10.3 on Registrant’s Form 8-K filed on February 16, 2005. (Commission File No. 1-4879).

*10.25	(i)	Form of 2003-2005 Performance Share Agreement — incorporated by reference to Exhibit 10.4 on Registrant’s Form or 8-K filed on February 16, 2005. (Commission File No. 1-4879).

*10.25	(ii)	Form of 2004-2006 Performance Share Agreement — incorporated by reference to Exhibit 10.5 on Registrant’s Form 8-K filed on February 16, 2005. (Commission File No. 1-4879).

*10.26		Diebold, Incorporated Annual Cash Bonus Plan — incorporated by reference to Exhibit A to Registrants’ Proxy Statement on Schedule 14A filed on March 16, 2005 (Commission File No. 001-04879)

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*		Reflects management contract or other compensatory arrangement.


	Page No.
PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Condensed Consolidated Balance Sheets - June 30, 2005 (Unaudited) and December 31, 2004 (Restated)		3

Condensed Consolidated Statements of Income (Unaudited)- Three Months and Six Months Ended June 30, 2005 and 2004 (Restated)		4

Condensed Consolidated Statements of Cash Flows (Unaudited)- Six Months Ended June 30, 2005 and 2004 (Restated)		5

Notes to Condensed Consolidated Financial Statements (Unaudited)		6

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		25

ITEM 4. Controls and Procedures		25

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings		26

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		26

ITEM 4. Submission of Matters to a Vote of Security Holders		26

ITEM 6. Exhibits		27

SIGNATURES		30

INDEX TO EXHIBITS		31
EX-31.1 Certification 302 - CEO
EX-31.2 Certification 302 - CFO
EX-32.1 Certification 906 - CEO
EX-32.2 Certification 906 - CFO


		DIEBOLD, INCORPORATED

		(Registrant)

Date : August 15, 2005	By:	/s/ Walden W. O’Dell

		Walden W. O’Dell
		Chairman of the Board and
		Chief Executive Officer
		(Principal Executive Officer)

Date : August 15, 2005	By:	/s/ Kevin J. Krakora

		Kevin J. Krakora
		Vice President, Corporate Controller and
		Acting Chief Financial Officer
		(Principal Financial Officer)


EXHIBIT NO.
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

32.2		Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

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